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As we know, 2012 has been a great year for many above average-yielding companies and the funds that invest in them.

The net asset value (NAV) of the average investment company in the UK growth and income sector is up by 15% so far this year – well above the return for the UK market, up 10.4% – and has also outperformed the average UK growth fund, which was up by 12.5% in 2012.

High-income stars

The real star performers are the UK high-income small-cap trusts, such as Acorn and Aberforth Geared Income , both up by about 40% this year. The UK high-income investment companies have also fared well, with the average fund returning 14.8% over the period. One of these that deserves a mention is Henderson High Income.

The £130 million fund has been managed by Alex Crooke at Henderson since 1997. Crooke is maybe better known for managing the Bankers Investment Trust , which he took on in 2003, meaning the Henderson High Income role predates Bankers.

His long-term track record is pretty good. Over 10 years he has beaten the UK market by more than 40% and, since December 1997, Henderson High Income’s NAV is up by 187% on a total return basis versus 103% for the UK market.

Following fashion

Henderson High Income started life as a conventional fund. In 2000, following the fashion, it became a split capital investment trust geared with zeros. Split capital investment trusts issue different classes of shares to appeal to different types of investors. Zeroes, meanwhile, are debt securities that pays no interest but render profit when they reach maturity.

In 2005, when splits were deeply out of favour and the zeros were maturing, the board opted to replace the zero gearing with bank debt.

I am not a huge fan of funds that are highly leveraged with bank debt – it makes them more vulnerable in market downturns than funds geared with zeros.

However, Henderson High Income’s net gearing at the end of September was 20%, which, while at the upper end of what I would normally be comfortable with, is not excessive. Moreover, it is offset by a portfolio of bonds of roughly equal size.

The maximum permitted gross level of gearing is 40%, but it is unlikely it would reach that level. To reflect the structure, the benchmark is 80% FTSE All Share and 20% Merrill Lynch Sterling Non Gilts index.

The split used to be 75:25 equities to bonds, but this was adjusted at the start of 2011 and the management fee arrangements were revised at the same time.

Fee structure

The main thing Crooke did was to cut the notice period to six months, in line with best practice. The new management fee is charged on gross assets, which is not ideal but it is set at 0.5% of average gross assets over two years, so ongoing charges were less than 0.9% last year.

Because the income from unit trusts goes up and down like a bride's nighty, whereas an investment trust's is rarely cut.

That said, Henderson High pays that eye-catching 6% not only because it is boxed in on income GROWTH (cf other High Income sector ITs such as Shires, Britih Assets and Merchants) but because it is consuming its own real capital worth.

The dividend jack-up in 2011 followed a decade of declining purchasing power in the payout, while in real terms NAV is about 70% of what it was twenty years ago. So this is not a substitute for a government-guaranteed deposit account.

The auto-cannibalistic way Crooke runs it is in complete contrast with Bankers, which is a stingy payer on half HHI's starting yield, but which keeps the dividend climbing in real terms.

I like both Bankers and Henderson High Income trusts. The former has been a steady performer over decades. I agree that there is a danger of exchanging capital for income in some of the high income trusts, but I think this is not a consideration whilst you are reinvesting dividends.

Personally I consider a portfolio of UK, Asia-Pacific, and global growth/income trusts is a good retirement strategy. Even if there is some reduction in capital over the long term this is still a better strategy than annuity purchase.

Excellent strategy Keith. I have a (retirement) portfolio based in ISA protected funds and trusts covering Europe, UK, Asia - even a small holding in Japan, emerging markets, global and corporate bonds. Most for income and capital only are cashed when necessary. Also some good divident paying single companies. Needs research to get it right and keeping a check on. Worth the effort without doubt.

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